Pentagon Must Act To Preserve Industrial Base

As a life-long believer in free-market capitalism and someone who opposed TARP, the stimulus package, the pay czar and cap-and-trade, it pains me to say that it is time for the government to take responsibility for one sector of the economy: defense. Up to this point, the Obama Administration has intervened on behalf of banks, the auto industry, insurance companies and even domestic producers of automobile tires. Yet, it has done nothing to protect and sustain the base on which our national security rests, a premier source of high technology for the rest of the economy. More distressing, in the midst of the worst economic environment in seventy years and while fighting two major wars, the White House allowed the Secretary of Defense to make a series of major decisions on defense procurement without any consideration of their industrial-base implications, thereby hurting both the economy and national security.

The defense industrial base stands at the edge of a precipice. Simply put, there is not enough demand going forward to ensure that companies in this sector can remain profitable or even stay in business without major reductions in workforce and capacity. The Department of Defense’s 2009 Industrial Capabilities Report to Congress identified major problems going forward in the aircraft, missiles, ships and space subsectors. If Secretary Gates has his way, in a few years the United States will have only two active production lines for military aircraft: the C-130 and the F-35. This hasn’t happened since the 1930s. Similarly, in the absence of new programs, the industrial base for building large, solid rocket boosters critical to both our strategic deterrent and our space program will be at risk. Without a program to design a new nuclear submarine, we could lose the capacity to design these complex platforms, something that did happen to the U.K. Absent careful management and judicious government support, we are in danger of losing critical defense design and development skills and manufacturing capacity that will be very difficult to resurrect.

The government has always had a schizophrenic view of the defense industrial base. On the one hand, it wants all the privileges of being a monopsony buyer, able to change the terms of contracts and even cancel programs at a moments notice. On the other hand, it wants to rely on free market incentives to shape the defense sector. The reality is that defense companies, faced with declining demand and an indifferent customer, are responding to these incentives by protecting themselves and their shareholders’ investments. They are doing so through aggressive cost cutting that means firing people, selling tools and shutting production lines. The loser will be national security.

There have been lots of inside-the-Beltway studies of this problem that have produced inside-the-Beltway answers. They always have the same recommendations: enhanced coordination, more cooperation, greater inclusion of industrial base issues in government policies and plans. Plan better, gather more data, reinvigorate activities, and consult more.

This is not good enough. If we are to preserve one of the crown jewels of our economy and a key determinant of future national security there needs to be direct government intervention in the defense industrial base. The Obama Administration needs a defense industrial policy designed to protect key capabilities both for design and manufacture of military systems. This means committing resources to conduct design competitions, the development of prototypes and engaging in some level of production even where the immediate demand for the new product is not apparent. There needs to be a new strategy for sustaining weapons systems, one that explicitly includes the private sector. Finally, there needs to be a radical revision of our export-control policy to allow for expanded foreign sales of U.S. defense products.